New ground for mortgage rates

Flickr photo by TheTruthAbout....

This week marked the first of several collisions ahead between markets and U.S. plans to borrow. Treasury yields have soared, but mortgages are holding in the fours.

New data failed to reinforce either the "Green Shooters" (economic optimists) or the "Agent Orangers" (economic pessimists), as prior historical guides are unreliable in a brand-new predicament.

Leading indicators rose 1 percent, the first gain in seven months. However, Orangers note that 0.44 percent of the boost came from a suspect rocket by stocks; another 0.28 percent from the jump in long-term Treasury rates, more likely to be destructive than helpful; and another roughly 0.28 percent from consumer attitudes improving from desperate to merely miserable.

The Shooters are adaptable. Tuesday's release of new housing starts and building permits was supposed to show housing bottom, and stocks rose in anticipation. The actual numbers, down 13 percent and 3.3 percent, respectively, were the worst ever measured, but good news! Less construction must mean less supply, therefore housing bottom. Stocks rose.

The Fed's staff produces the best forecast available. State secrets until a few years ago, these forecasts are public just three weeks after each Fed meeting. The minutes of April 28-29 (see here) were badly misread upon release this week: media and Street sources initially reported the Fed is "considering" an increase in its purchases of Treasurys, and Treasury rates fell. The same crew also reported the Fed had altered its forecast to the downside.

Wrong and wrong. There was no debate on increased purchases, merely unanimous decision to wait-to-see. Then, there are two forecasts at Fed meetings: one by the 12 regional Feds and another by the staff -- the latter is historically by far the more accurate of the two.

The regional banks cut their forecast, but the staff boosted its outlook: "Real GDP to edge higher in the second half"; "Fiscal stimulus"; "Bottoming of housing"; "Turn in the inventory cycle"; "Gradual recovery of financial markets."

Markets figured it out: an improving economy and no Fed support for Treasurys? Sell. The 10-year T-note blew to 3.44 percent from the high twos of fall through winter. ...CONTINUED

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